Abstract

International Fragmentation of Production and the Intrafirm Trade
of U.S. Multinational Companies
by Maria Borga and William J. Zeile

An aspect of globalization that has attracted increased attention in
recent years is trade in intermediate inputs associated with the fragmentation
of production across national borders. This trade takes the form of intrafirm
transactions when production stages in different countries are performed
by vertically integrated units of a multinational firm. Using firm-level
data on U.S. multinational companies collected by the U.S. Bureau of Economic
Analysis, this paper examines intrafirm shipments of intermediate inputs
from U.S. parent companies to their foreign manufacturing affiliates.
We relate the propensity of affiliates to source intermediate inputs from
their parents to characteristics of the parent company, of the affiliate,
and of the affiliate’s host country and industry that we hypothesize
will influence the volume of intrafirm trade associated with fragmentation.
Our results indicate that this trade is positively related to industry
and affiliate characteristics that suggest fragmented production, to host-country
characteristics that offer cost advantages, and to parent and affiliate
characteristics that favor internalized transactions and the active coordination
of different stages of the production process. The signs on the coefficients
for a number of variables suggest a division of labor between higher-skilled,
or more technologically advanced, activities performed by the parent and
lower-skilled, or more rudimentary, activities performed by the affiliate.